Despite an increase in Covid-19 cases, the stock market has remained little affected. Who has invested? Are there any concerns? How should investors proceed?
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In spite of the third wave of Covid-19 spreading rapidly and several states imposing restrictions, the stock market remains largely unaffected. There are about 90,000 active Covid cases on Wednesday as opposed to less than 10,000 on December 28. The benchmark Sensex is over 2,400 points higher, or 4.2%, after closing at 60,223 on Wednesday. The market, however, witnessed a 1% correction on Thursday after the minutes of the US Federal Open Market Committee meeting on December 14-15 indicated a more hawkish monetary policy stance.
Who has invested?
The recent rally has been supported by an inflow of foreign portfolio investors, despite domestic institutional investors remaining big bulls over the last six weeks. In the last three trading sessions, FPIs have invested a net of Rs 4,306 crore, compared to the net of over Rs 40,000 crore they have pulled out since November 22, 2021, amid indications that the US Federal Reserve will tighten its monetary policy.
Market participants say that the Reserve Bank of India may now defer plans to raise interest rates in India has given the market another boost.
Also, investors are reassured that Omicron, while fast-spreading, causes less severe disease, and that state governments may not impose lockdowns that would hurt the economy too much.
“Dow Jones setting a new all-time new high when the number of daily Omicron cases crossed one million in the US might appear as a paradox, but this is a clear message from the market that the fast-spreading, less virulent variant of the virus marks the beginning of the end of the pandemic. Also, most countries are not imposing fresh restrictions impacting economic activity,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Are there any concerns?
As seen on Thursday, the markets are likely to see bouts of volatility due to concerns about inflation, higher interest rates and increasing Covid cases. It was noted in the minutes of the Fed meeting released on Wednesday that the Fed might not only hike interest rates sooner than expected but also reduce its asset holdings to check inflation.
On Wednesday, the Dow Jones index fell 1.07%, while the Nasdaq fell 3.3%. Also on Thursday, the Nikkei in Japan fell by 2.9%, and the Sensex dropped by 1% (621 points) to close at 59,601.84.
In emerging economies, there are concerns that a sooner-than-expected hike in interest rates in the US may result in a larger outflow of foreign direct investment funds. Furthermore, it would result in funds moving from equities to debt instruments, which is causing equity prices to decline.
The economy, which is experiencing a fragile recovery, could be hit if states impose lockdowns. Additionally, investors are also anticipating the third quarter earnings reports from the corporate sector. According to market participants, all of these factors could keep the market volatile over the next two to three weeks.
How will the impact be different from the previous wave?
Investors should look back and see how the markets traded during the second Covid wave before pressing the panic button. As active cases in India rose from 20,000 to over 4.1 lakh between March 10 and May 6, 2021, the Sensex fell from 51,279 to 48,253, a 5.9% drop. The Sensex, however, recovered quickly after the cases declined over the next month, reaching a new high of over 52,000 in June. It went on to reach an all-time high of over 62,000 in July.
The question facing the market now is: how far will Omicron affect the economy? The economic impact is expected to be shallower than the second wave, based on past and international experience. Our base case for GDP forecast includes downside risks. According to Radhika Rao, Senior Economist at DBS Bank, “slower policy normalisation (by RBI) is likely to be accompanied by a gradual reduction of fiscal deficits.”
What should you do?
FPIs will likely remain buyers and domestic institutions will support the market, so key stock indices are likely to gain more ground. Retail investors and mutual funds are expected to inject more money into the market in 2021; systematic investment plans have continued to flow into the market. Meanwhile, there is still plenty of liquidity in the economy. In February, the Union Budget and the RBI’s decision at its next policy meeting will provide further direction to the markets.
Experts stress investors should not panic in the next two to three weeks, regardless of how fast Covid spreads. Although investors should not take undue risks in lesser-known companies and in small caps and new age companies, they should rebalance their portfolios appropriately. According to a fund manager, if an investor is overweight in equity, he/she needs to move some funds to hybrid funds. If, however, an investor is underweight in equities, they can continue to invest in equities and invest in flexicap funds to diversify their exposure.